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Im looking at an example of calculating intrinsic value using DCF model.

https://www.investopedia.com/university/dcf/dcf4.asp

Here he calculates the terminal value as

terminal value

Then in his final calculation he does

CF1/DSC1 + CF2/DSC2 + ... + CFn/DSCn + TerminalValue(as computed above)/DSCn

Do he discounts the Terminal value. However, I believe the discount rate is accounted for in the calculation of the terminal value already. Because the denominator of the terminal value calculation includes the discount rate already.

Has the author of the article made a mistake?

2 Answers 2

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Has the author of the article made a mistake?

No - the terminal value discounts the perpetual growing cash flows after year N back to year N using the discount rate d, then discounts the equivalent cash flow in year N back to the present time.

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No.

Say the terminal period starts at year N

The part of the terminal value being discounted twice is wrong because the calculation of terminal value (a formula derived by the addition of those things that over time tend to converge towards a particular value) brings all the cash flows after the time period N back to the start of N. Now, we need to bring that number (terminal value) to the start of our forecasting time, thus getting it back by discounting it by multiplying it by 1/(1+r)^N

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